With Terence Kealey This is a continuation of our earlier post here, written in response to this recent EconTalk episode on which Mazzucato was the guest. Mazzucato’s key idea is that the government’s pockets are virtually inexhaustible: government “can print money”, as she explains to Roberts. When push comes to shove, the government isn’t bound to scarcity: it goes to Afghanistan, it bombs Iraq, it enters the space race no matter what. Is that supposed to be an argument for government spending? Does profligacy really imply a wise use of resources? Her thesis has an autobiographical background: “my Dad does basic research on nuclear fusion physics, so he left Italy to go to the United States because the U.S. Department of Energy has been a big investor in these
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with Terence Kealey
Mazzucato’s key idea is that the government’s pockets are virtually inexhaustible: government “can print money”, as she explains to Roberts. When push comes to shove, the government isn’t bound to scarcity: it goes to Afghanistan, it bombs Iraq, it enters the space race no matter what. Is that supposed to be an argument for government spending? Does profligacy really imply a wise use of resources?
Her thesis has an autobiographical background: “my Dad does basic research on nuclear fusion physics, so he left Italy to go to the United States because the U.S. Department of Energy has been a big investor in these kinds of basic research–energy, areas the private sector, you know, wasn’t willing to invest in”. Yes, to explain why almighty US universities are so resourceful, the government may be a factor, but it is hardly the only one: they are part of an intensely competitive ecosystem, and benefit from private funding, to an extent European universities can’t even dream of. The US government is so resourceful also because it takes advantage of a successful market economy: it doesn’t create money out of thin air, though Mazzucato seems to think differently.
Listen to Mazzucato carefully. One thing you won’t find in her passionate advocacy is much evidence. We owe the Internet and the iPhone to the government. Why? Mazzucato frequently speaks of DARPA, but neither in her chat with Roberts nor in her book The Entrepreneurial State does she explain WHY. She has no analysis of why a certain kind of government spending is supposed to be conducive to innovation. With Roberts, she concedes that government money should be spent “wisely”, but never defines what she means by that. Institutional details are irrelevant, in her own account.
Another thing you won’t find in Mazzucato is the counter-factual. The empirical evidence suggests that every dollar, euro, or pound a government spends on R&D crowds out markedly more dollars, euros, or pounds. Thus economists Archibugi and Filippetti reported in 2018 that “from 1981 to 2013 the share of public-financed R&D to GDP [in the major economies] has reduced from 0.82% to 0.67%. By contrast industry financed R&D has increased from 0.96% GDP in 1981 to 1.44% in 2013,” which one of us predicted 20 years ago, yet Mazzucato won’t address the point. Indeed, we have each written critiques of her work: the points made in those article she does not address.
Mazzucato, moreover, seems to have no understanding of the importance of feedback mechanisms. Nobody possesses enough knowledge to be always right: the main argument for the free market is not, as Mazzucato seems to believe, that the private sector is superior morally or in any other sense, but that the market allows for feedback mechanisms that make it possible for people to correct their mistakes in a smoother and faster way than a bureaucracy can. Meaningful innovation, i.e., innovation that is useful to real people in the real world, desperately needs such feedback. Can bureaucracies be run with “flexible” decision making, as she says? Perhaps so, but one should wonder at what cost, and with what sort of difficulties. But generally speaking, in the podcast as well as in her writings, Mazzucato really appears to believe that the only thing innovation needs is unlimited funding: a condition the state clearly is more likely to provide than is any private investor.
Let’s go to what she considers her silver bullet. The iPhone is supposed to be something we owe to the government because Wayne Westerman, who developed the version of the touchscreen which is used in the iPhone, had his PhD financed by the National Science Foundation. Blogger Nintil looked at the same sources Mazzucato quotes and explained clearly that the origins of some technologies were a bit more complex than she writes. In particular, “State interventions in science that were conducive to the iPhone were neither crucial nor entrepreneurial, nor as numerous as Mazzucato tries to show.”
In her chat with Russ Roberts, Mazzucato repeatedly claims she is not hostile to the private sector. She is fine with it, insofar as it is part of a greater corporatist scheme: this explains why she defends IRI, a legacy of the fascist regime that established it, during the Great Depression, to bail out troubled corporations. In its initial phase, Mazzucato argues, IRI was well managed: which may well be true. But what happened later? Why did the quality of its management deteriorate? And, perhaps more important, why were the bulk of Italy’s nationalised businesses precisely the companies that fostered that widespread system of corruption that exploded in the early Nineties, leading to the investigation and trial of an entire political class? If Mazzucato’s argument is that government businesses will work well and innovate tremendously, insofar as resources are unlimited and good people are in charge, we can certainly agree with that. But is it perhaps worth thinking about the likelihood of such conditions?
Mazzucato claims that the marginal revolution of Menger, Jevons and Walras has allowed modern economists to evade their responsibilities to public welfare and, instead, to privatise value; whereas it has only augmented the value of the word “value” in economics. The value of a good is different from the value of a free market, and the fact that one is built on the other does not justify their confusion in a piece of rhetoric.
 On the incentives’ structure behind DARPA, see this recent post by Arnold Kling: http://www.arnoldkling.com/blog/tyler-cowen-nsf-and-darpa/.
 Daniele Archibugi & Andrea Filippetti, “The retreat of public research and its adverse consequences on innovation”, Technological Forecasting and Social Change, 2018, 127: 97-111.
 Terence Kealey, The Economic Laws of Scientific Research, London, Macmillan, 1996.
 See Terence Kealey, “The Scientific State”, Standpoint, June 2014; Alberto Mingardi, “A Critique of Mazzucato’s Entrepreneurial State”, Cato Journal, 2015, 35: 603-625; Terence Kealey, “Marianna Mazzucato, The Entrepreneurial State”, The Journal of Prices & Markets, 2016, II:78-80.
 IRI stands for Istituto per la Ricostruzione Industriale (Institute for Industrial Reconstruction). Mazzucato talks of a phase in which IRI was public and well managed, a phase in which it was public and poorly managed and a third, “privatized” phase of IRI. Yet the Institute was an industrial conglomerate and the businesses it owned were privatised separately. In the Podcast she alludes to the building of highways, but it is worth remembering that at a certain point IRI was involved in all sorts of activities going from the airline Alitalia to the food business of producing tomato sauce and panettone. IRI also controlled the bulk of the Italian banking sector.